SRA considers credit ratings for professional indemnity insurers

The SRA has announced that it is considering the introduction of a financial rating criteria for professional indemnity insurance (PII) underwriters.

The regulator opened a general review into PII in May, after Latvian insurer Balva was halted from taking on new business in the UK at the end of March.

The review has now been extended to include an assessment of the implications of introducing a financial rating criteria.

The results of the review, and any associated decisions, are due to be made in time for the indemnity period starting on 1 October 2014.

SRA director for policy Agnieszka Scott said that in the past, despite numerous calls to limit the PII market only to rated insurers, the SRA had not wanted to present an unwarranted barrier to entry.

“However, in the light of the insolvency of Lemma last year and recent developments with Balva, we decided that we need to look again at the impact of introducing a financial rating criteria,” she said in the statement released today.

Scott was also clear to point out that regulation of the insurance industry was not in the SRA’s remit.

To be eligible to write compulsory professional indemnity insurance for solicitors, an insurer must be authorised by the Prudential Regulation Authority (PRA) or be an EEA insurer passported into this country to write insurance business. Until now the SRA has always deferred to the relevant regulatory bodies to vet the financial stability of insurers.

Around 1,300 firms were put at risk after Balva was forced to call in liquidators (18 June 2013).

Under the current rules firms insured by an insolvent insurer are required to find alternative cover in the live market within 28 days or are forced into the assigned risks pool (ARP), where policy rates are charged at a premium.

In 2010 the SRA commissioned consultants Charles River Associates (CRA) to examine opportunities to reform the PII market after insurers participating in the sector warned of huge rate hikes (29 October 2010).

That review is due to end in September. Some changes were introduced through the SRA’s Financial Protection Policy Statement in April 2011 and further changes will be introduced for the indemnity year starting on 1 October 2013.

These include changes to how the ARP is governed, meaning that firms are now only allowed to stay in the ARP for three months, unless they are granted special waivers by the SRA. Those that are still unable to find cover after that point will be forced to cease trading because they do not carry PII insurance.

Policies starting on or after 1 October 2013 will no longer automatically expire on 30 September the following year. Firms will be able to negotiate any length policy they like.

The Law Society’s recommendation that the Qualifying Insurers List should change its name to the Participating Insurers List will also be introduced to prevent the name leading people to believe that listed insurers have been vetted by the SRA.

If a minimum rating requirement is implemented, it must not be done without simultaneously reducing the breadth of cover. Otherwise many, possibly over a thousand, firms will be unable to find cover, will close and will cause a massive increase in intervention costs borne by the rest of the profession.

That might be possible, but the focus on financial stability could mean we lose sight of the fact that law firms are not banks, and how far we should pursue this depends on the appetite for closing down law firms of all sizes and profiles, though I suspect the impact would be more severe at the consumer end of the market. Access to justice, or to legal services at least, would be reduced.

Reducing the breadth of cover would definitely help offset the cost impact from insisting that firms buy from Insurers with a minimum credit rating. Everyone would benefit over time with new entrants more likely to loosen the anti-competitive stranglehold that the ‘exclusive’ facilities have on the market. Its a concern though that this will not take effect until 2014. By that time the 1,300 Balva policyholders could well have bought replacement policies with an equally uncertain ability to deliver, creating an even worse financial nightmare that could haunt the profession for years.